HG 

162C3 


UC-NRLF 


'Q 


Rflfil   '1?    NKC  - 


s 


ffllH 


e 


THE  TREND 
AND  PROGRESS  OF  THE 

MOVEMENT  TO 

IMPROVE  SMALL  LOAN 

CONDITIONS 


BY 

ARTHUR  H.  HAM 


! 

. 


• 


'  j 

t*        '      ' 


The  Trend  and 
Progress  of  the  Movement 

to  Improve 
Small  Loan  Conditions 


By 

ARTHUR    H.  HAM 

>< 

SECOND  VICE-PRESIDENT  PROVIDENT  LOAN  SOCIETY,  NF.W  YORK 

CHAIRMAN    NATIONAL    FEDERATION    OF    REMEDIAL    LOAN    ASSOCIATIONS' 

AMD  FORMER  DIRECTOR  OF  THE  DIVISION  OF   REMEr.AL  LOANS 

RUSSELL    SAGE    FOUNDATION,    NEW    YORK 


An  Address  before  the 

Seventh  Annual  Convention  of  the 

American  Industrial  Lenders'  Association 

Chicago,  September  23,  1921 


PUBLISHED     BY 

American  Industrial  Lenders'  Association 

HARRISBURG,  PENNSYLVANIA 


•    .  • 


•  .      •    '•:.::•• 


i 


The  TREND  and  PROGRESS 

OF  THE  MOVEMENT  TO  IMPROVE 

SMALL  LOAN  CONDITIONS 


HE  small-loan  business  is  an  old  one  in  this 
country,  and  some  of  the  evils  surrounding  it 
go  back  to  our  earliest  records  of  the  business. 
It  is  said  that  Abraham  Lincoln's  first  public 
address,  when  running  for  election  to  the 
legislature  of  Illinois,  was  devoted  to  a  discussion  of  the 
prevailing  high  interest  rates  on  small  loans,  and  he  pledged 
himself,  if  elected,  to  put  through  a  law  making  such  rates 
illegal  and  punishable.  His  good  intentions  cannot  be 
questioned,  but,  like  many  others  who  came  after  him,  he 
was  acting  upon  insufficient  knowledge  of  the  subject. 

The  first  real  attempt  to  make  a  serious  and  exhaustive 
study  of  the  subject  before  attempting  a  reform  was  that 
begun  by  the  Russell  Sage  Foundation  in  1907-08,  when  it 
financed  preliminary  investigations  and  publication  of 
reports  on  the  salary  and  chattel  loan  business,  by  Dr. 
Clarence  Wassam  and  myself,  then  holding  fellowships  in 
the  Bureau  of  Social  Research. 

The  preliminary  studies  showed  the  business  of  lending 
small  sums  on  security  of  pledge  or  mortgage  of  personal 
property  and  assignments  of  wages  to  be  an  extensive  one, 
and  that  under  the  conditions  which  governed  it  a  consider- 
able proportion  of  borrowers  were  being  exploited  instead  of 
relieved.  It  was  realized  that  the  subject  was  an  involved 
one,  but  as  the  extent  and  manner  of  the  operations  of  many 
of  the  agencies  engaged  in  the  business  were  recognized  as 
an  important  cause  of  poverty  and  distress,  the  subject 
came  well  within  the  purview  of  the  Foundation.  Con- 
sequently I  was  assigned  to  make  a  further  study  of  the 
matter,  and  a  year  later  was  appointed  Director  of  the  Divi- 


sion  of  Remedial  Loans  which  was  organized  by  the  Founda- 
tion in  October,  1910. 

The  object  of  the  Division  was  to  conduct  a  campaign  of 
public  education  with  regard  to  the  necessity  for  the  small- 
loan  business  as  a  part  of  our  fiscal  machinery  and  point  out 
the  evil  effects  resulting  from  the  operations  of  the  prevailing 
commercial  agencies  in  this  field;  to  procure  intelligent, 
reasonable  legislation  based  on  a  desire  to  regulate  rather 
tha*n  to  annihilate  the  business;  to  secure  the  enforcement 
of  such  laws  and  oppose  the  passage  of  drastic,  impractical 
laws;  and  to  encourage  the  organization  of  remedial  loan 
societies  that  would  make  loans  at  the  lowest  rate  consistent 
with  sound  business  principles  and  a  reasonable  but  definitely 
limited  return  upon  capital. 

These  societies  were  expected  to  provide  such  competition 
as  would  result  in  an  improvement  of  the  methods  commonly 
employed  by  money-lenders  and  to  afford  an  object  lesson 
that  would  attract  reputable  capital  into  the  business.  It 
was  never  expected  or  hoped  that  the  remedial  loan  societies 
would  so  grow  in  strength  or  in  numbers  as  to  monopolize 
the  field.  They  were  intended  as  experimental  agencies— 
an  object  lesson — a  stabilizing  force.  I  know  that  the  Divi- 
sion was  looked  upon  by  the  loan  men  as  an  enemy  of  the 
business;  that  it  was  believed  to  be  seeking  to  drive  out  the 
money-lender  and  monopolize  the  field  for  the  remedial  loan 
societies.  It  was  even  stated  that  the  Foundation  was  seek- 
ing in  the  small-loan  field  a  profitable  way  of  investing  its 
endowment.  Nothing  could  be  farther  from  the  truth,  but 
the  loan  men  were  slow  to  realize  it. 

We  found  that  usury,  like  profiteering,  is  readily  de- 
nounced but  not  so  easily  defined  or  prevented.  We  found 
ourselves  standing  between  two  groups  or  forces;  one  repre- 
senting the  belief  that  all  loans,  no  matter  how  small  or  upon 
what  form  of  security  made  should  be  limited  in  interest  to 
the  ordinary  banking  rate;  the  other  representing  the  belief 
that  competition  untrammeled  by  law  or  regulation  could 
be  trusted  to  establish  interest  rates,  and  that  rates  so  fixed 
were  bound  to  be  fair  and  reasonable. 


The  first  group  consisted  of  a  large  part  of  the  public  which 
had  any  opinion  on  the  subject  whatever,  and  its  views  were 
frequently  and  forcefully  voiced  by  newspaper  editors, 
legislators,  and  would-be  reformers,  who  traced  their  authori- 
ties back  to  and  before  the  dawn  of  the  Christian  Era  and 
justified  their  opinions  by  extensive  quotations  from  the 
Bible  and  the  Roman  law-makers.  The  other  school,  whose 
members  professed  to  believe  that  the  solution  was  to  be 
found  in  unregulated  competition,  consisted  largely  of  high- 
rate  money-lenders  who  viewed  any  restriction  that  promised 
to  be  effective  as  an  unwarranted  encroachment  upon  their 
rights  and  a  violation  of  sound  economic  law.  They  could 
not  trace  their  family  tree  as  far  back  as  the  first  group. 
Their  patron  saint  was  Jeremy  Bentham,  an  economist  of 
the  late  i8th  Century  who  gave  birth  to  this  famous  doc- 
trine: "If  I  borrow  a  sum  of  money  with  interest  at  100  per 
cent  per  annum  and  can  find  no  one  else  willing  to  lend  to 
me  at  a  lower  rate,  then  the  rate  of  100  per  cent  is  fair  and 
reasonable."  This  is  not  an  exact  quotation  from  the  well- 
known  Jeremy,  but  is  substantially  correct. 

The  contention  of  the  first  group — that  banking  rates 
should  govern  small  loans — was  effectively  disproved  by  the 
unsuccessful  experiences  of  those  agencies  which  attempted 
to  make  small  loans  at  banking  rates  on  non-fluid  and  non- 
substantial  security.  Of  course,  I  know  that  we  still  have  a 
chain  of  loan  agencies  in  many  cities,  organized  to  "lend  to 
workingmen  on  their  character  at  6  per  cent  per  annum" 
which  are  accomplishing  "remarkable  sociological  results." 
Suffice  it  to  say  that  there  has  been  nothing  in  their  exper- 
ience to  justify  the  belief  that  small  loans  can  be  made  at 
banking  interest.  Such  a  belief  has  no  basis  other  than 
in  sentiment,  and  a  remedial  plan  based  upon  sentiment 
without  regard  to  knowledge  and  experience  never  cured 
any  evil,  and  never  will.  Small  loans  are  a  necessity  in 
our  present  state  of  civilization,  and  any  attempt  to  work 
unnecessary  hardships  on  the  lender,  to  compass  him  about 
with  unreasonable  restrictions,  has  the  inevitable  result  ot 
forcing  the  borrower  to  pay  a  still  higher  charge  than 


he  "would 'otherwise  pay.  If  borrowing  under  the  law  is 
limited  by  impossible  restrictions,  then  both  borrower 
and  lender  will  defy  the  law  and  take  their  chances  on  its 
being  enforced.  In  the  end  the  borrower  always  pays  the 
price  in  high  interest  charges. 

The  contention  of  the  second  group — that  the  determi- 
nation of  the  rate  may  be  left  entirely  to  competition — 
holds  true  only  when  the  lender  and  borrower  are  on  a  sub- 
stantially even  footing.  In  large  loans  secured  by  real  estate 
mortgages  or  marketable  securities,  the  law  of  competition 
may  have  full  play,  the  rate  being  determined  by  the  lowest 
figure  at  which  money  can  be  secured.  But  in  the  case  of 
small  loans  the  inherent  inequality  of  lender  and  borrower 
vitiates  this  law.  It  can  have  no  basis  except  in  the  ability 
of  the  borrower  to  refuse  the  terms  offered,  if  too  onerous. 
This  the  small  borrower  rarely  can  do.  He  goes  to  the  loan 
agency  as  a  last  resort  and  when  his  need  for  money  is  im- 
perative. By  reason  of  this  urgency  and  his  inability  to  get 
money  from  another  source,  he  is  in  no  position  to  bargain, 
with  the  result  that  the  lender,  unless  otherwise  controlled, 
charges  an  unreasonable  rate. 

At  the  time  the  Division  of  Remedial  Loans  was  organized, 
most  of  the  states  were  depending  upon  one  of  the  two 
theories,  to  which  I  have  referred,  to  regulate  the  business, 
and  we  spent  much  time  in  gathering  data  as  to  the  effect  of 
such  laws.  I  need  not  take  up  your  time  this  evening  to 
describe  our  investigations,  to  recount  the  cases  of  rank  ex- 
tortion found  to  have  occurred  under  the  most  drastic  as 
well  as  the  most  liberal  types  of  law.  You  are  doubtless  all 
familiar  with  the  conditions  which  we  found  to  exist.  That 
such  laws  were  uniformly  unsatisfactory  in  practice  was 
conclusively  demonstrated,  and  we  determined  to  advance 
another  plan  of  control  which,  though  it  could  boast  no 
ancient  lineage,  seemed  sound  and  practical — i.  e.,  reasonable 
interest  rates  under  state  license  and  supervision.  This  plan 
was  based  on  a  recognition  of  the  small-loan  business,  not  as 
a  parasitic  growth  but  as  a  necessary  element  in  our  financial 
system,  and  on  a  desire  to  attract  into  the  business  reputable 


capital  which  should  furnish  the  sort  of  competition  neces- 
sary to  keep  profits  within  reasonable  limits.  It  was  our  aim 
from  the  outset  to  dissociate  the  small-loan  business  from 
the  character  of  some  of  those  engaged  in  it;  to  show  that  it 
was  the  practice  of  the  loan  sharks  and  not  the  need  for  loans 
that  was  disreputable.  To  educate  the  public  to  a  reali- 
zation that  the  evil  was  inherent  in  the  methods  pursued, 
which  were  more  or  less  a  product  of  the  laws  in  force,  and 
not  in  the  institution  itself,  was  not  an  easy  task.  Our  facts 
and  motives  were  at  first  questioned.  The  conscientious 
objectors  received  able  succor  from  the  loan  men  them- 
selves, who,  perhaps  not  unnaturally,  felt  constrained  to 
oppose  us  as  strenuously  as  they  had  opposed  previous 
interference  from  any  quarter.  If  we  had  been  able  to  con- 
vince the  loan  men  of  our  good  faith,  the  story  would  not 
have  been  so  long  in  the  writing.  But,  gradually,  as 
a  result  of  speeches,  articles,  motion  pictures,  and  meet- 
ings, defense  of  borrowers,  arrests  and  prosecutions,  and 
every  available  means  of  propaganda,  we  began  to 
secure  results. 

As  a  result  of  our  study  of  existing  conditions  and  existing 
laws,  we  drafted  a  bill  which  required  all  lenders  charging 
more  than  the  banking  rate  to  submit  to  license  and  frequent 
examination  by  the  State  Banking  Department.  This  bill 
set  up  numerous  safeguards  for  the  protection  of  borrowers 
which  experience  had  shown  to  be  necessary,  and  provided 
adequate  penalties  for  violation,  with  power  of  enforcement 
in  the  hands  of  the  supervisory  authority.  It  authorized 
licensed  lenders  to  charge  on  loans  of  less  than  $300,  an 
interest  rate  of  2  per  cent  monthly,  to  be  computed  on  un- 
paid balances  as  instalment  payments  were  made,  with  a 
small  additional  fee  to  cover  the  cost  of  drawing  and  record- 
ing necessary  instruments.  A  brief  experience  with  this  law 
showed  the  difficulty  of  safeguarding  the  fee  charge  against 
undue  repetition  and  indicated  that  the  interest  rate  alone 
under  all  conditions  was  insufficient  to  cover  the  necessary 
costs  and  yield  a  reasonable  profit.  An  alternative  provision 
of  a  flat  rate  of  3  per  cent  per  month  without  fees  was  sub- 


stituted,  and  in  spite  of  determined  opposition  several  states 
were  induced  to  enact  the  bill  into  law. 

In  the  meantime,  the  American  Association  of  Small- 
Loan  Brokers  had  been  organized  by  some  of  the  farsighted 
loan  men.  Opportunities  for  contact  and  exchange  of  views 
between  them  and  ourselves  became  more  frequent,  and 
then  came  the  epochal  day  when  a  committee  of  that  Asso- 
ciation, consisting  of  Messrs.  Harbison,  East,  Watts, 
Hubachek,  Aufderheide,  and  Col.  Hodson  met  with  Mr. 
Glenn,  General  Director  of  the  Foundation,  Mr.  Hilborn, 
Attorney  for  the  Division  of  Remedial  Loans,  and  myself  in 
my  office.  For  three  days  we  debated  the  subject  and 
finally  agreed  upon  a  redraft  of  the  bill  which  was  to  be 
known  as  the  "Uniform  Small  Loan  Law."  The  new  draft, 
besides  other  minor  amendments,  permitted  a  flat  interest 
rate  of  3^  per  cent  per  month  without  fees  or  other  charges. 
A  higher  rate  had  been  proved  to  be  unnecessary;  a  lower 
rate  had  proved  insufficient  to  provide  capital  needed  to 
meet  the  demand  for  loans  in  the  small  cities;  a  combination 
of  a  lower  rate  with  additional  fees  had  proved  too  susceptible 
of  abuse.  The  new  rate  was  based  upon  definite  information 
concerning  the  necessary  costs  of  operation  and  was  keyed 
to  the  business  of  the  lender  of  average  capital  in  the  mod- 
erate-sized cities. 

The  drafted  bill  reflected  a  desire  to  do  justice  to  both 
borrower  and  lender.  It  recognized  the  fact  that  small- 
loan  agencies,  unlike  banks,  have  no  deposits  and  must  do 
business  on  their  own  capital;  that  their  security  is  not 
substantial  or  fluid;  that  small  loans  on  chattel  mortgage 
or  wage  assignment  security  require  more  investigation  than 
bank  loans;  that  instalment  repayments  necessitate  a  large 
bookkeeping  and  collecting  system;  and  that  reputable 
capital  would  not  come  into  the  business  unless  it  could  see 
the  prospect  of  profit  above  the  necessarily  high  overhead 
cost.  The  bill  also  recognized  the  necessity  of  protecting  the 
borrower;  of  seeing  that  he  understands  the  terms  of  the 
loan  and  of  his  contract,  that  he  shall  receive  a  receipt  for 
all  payments;  of  providing  a  means  of  recovery  in  case  of 


8 


overcharge  and  of  giving  the  supervisory  power  free  access 
to  all  necessary  data  that  he  may  determine  whether  the  law 
is  being  religiously  observed. 

Of  course,  the  new  bill  encountered  strenuous  opposition 
from  the  public  who  considered  the  rate  of  interest  too 
liberal,  and  from  lenders  who  considered  it  too  low  and 
thought  the  law  too  drastic  in  other  respects. 

I  will  not  detail  the  efforts  made  to  line  up  support  for  the 
bill,  how  the  social  and  civic  agencies  eventually  came  to 
our  assistance  and  newspapers  rallied  to  the  cause.  No 
history  of  the  movement  would  be  complete  if  it  failed  to 
give  large  credit  to  such  agencies  and  to  the  public-spirited 
men  in  the  various  states  who  gave  us  their  help.  The  time 
allotted  will  not  permit  me  to  do  more  than  refer  to  that 
fact.  One  by  one  the  barriers  were  forced  down  and  the 
striking  fact  before  us  is  that  in  the  short  space  of  five  years 
this  bill  is  now  a  law,  either  in  toto  or  in  large  part,  in  nearly 
half  the  states  of  the  Union,  and  has  fulfilled  our  hopes 
and  expectations.  Its  constitutionality  has  been  definitely 
established.  It  is  being  ably  administered  by  state  officials 
who  have  come  to  have  an  appreciation  of  the  importance 
of  the  business,  a  respect  for  the  licensed  lenders  and  a  real- 
ization of  the  earnestness  and  sincerity  of  purpose  of  the 
American  Industrial  Lenders'  Association  and  its  constituent 
state  bodies  which  are  striving  to  police  the  business  and 
maintain  it  upon  its  new  and  high  plane.  The  new  law  has 
vindicated  the  belief  that  neither  a  laissez-faire  policy  nor 
coercive  measures  will  cure  the  evil  of  usury — that  the 
remedy  lies  in  the  creation  of  something  that  will  facilitate 
credit  and  increase  the  monev  in  circulation  and  the  means 

m 

and  sources  bv  and  from  which  it  can  be  obtained. 

¥ 

The  law  has  reduced  unnecessary  borrowing  and  lightened 
the  burden  of  the  deserving  borrower.  It  has  reduced  the 
losses  of  the  lender,  legitimatized  the  business  and  those 
engaged  in  it.  It  has  substituted  respect  for  disrepute.  It 
has  saved  the  borrowing  public  from  the  payment  of  excess 
interest  running  into  many  millions  of  dollars. 

In  bringing  about  this  new  and  highly  desirable  condition. 


the  American  Industrial  Lenders'  Association  has  played  a 
very  important  part,  and  it  is  destined  to  play  an  even  more 
important  part  in  the  further  advance  of  the  law  and  the 
complete  metamorphosis  of  this  once  sordid  business.  I 
am  not  going  to  indulge  in  fulsome  praise  of  your  efforts. 
I  doubt  whether  you  yet  deserve  a  place  in  the  roll  of  fame 
beside  the  Christian  martyrs  or  those  who  have  given  their 
lives  in  the  cause  of  humanity.  You  have  simply  had  the 
good  sense  to  recognize  the  right  road  when  you  saw  it,  the 
courage  to  stand  up  and  be  counted  in  favor  of  a  proposition 
which  to  the  lending  fraternity  generally  was  anathema,  the 
will  and  determination  to  stick  to  your  declaration  of  prin- 
ciples and  by  fair  dealing  and  honest  practice  gain  the 
confidence  of  your  clientele,  the  cooperation  of  the  agencies 
of  reform  and  the  respect  of  the  general  public.  These  I 
think  you  have  already  obtained  to  a  marked  degree  and 
will  ultimately  possess  in  their  entirety  if  you  continue  to 
follow  the  course  you  have  charted. 


10 


RETURN  TO  the  circulation  desk  of  any 
University  of  California  Library 

or  to  the 

NORTHERN  REGIONAL  LIBRARY  FACILITY 
Bldg.  400,  Richmond  Field  Station 
University  of  California 
Richmond,  CA  94804-4698 

ALL  BOOKS  MAY  BE  RECALLED  AFTER  7  DAYS 

•  2-month  loans  may  be  renewed  by  calling 
(510)642-6753 

•  1-year  loans  may  be  recharged  by  bringing 
books  to  NRLF 

•  Renewals  and  recharges  may  be  made 
4  days  prior  to  due  date 


DUE  AS  STAMPED  BELOW 


JAM  1 4  2003 


DD20   15M  4-02 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


OCT  101935 


